What Is The Impact Of A Stockbroker Churning An Account?
A stockbroker churning an account is one of the most potentially damaging things that can happen to an investors portfolio.
Churning is a term given to excessive trading. The trading is a way to generate commissions for the broker and his firm. As you may imagine, trading an account on a very frequest basis makes it almost impossible for any investment to show a profit and as such, the fees and charges will quickly reduce an account to almost zero.
In fact, there have been a number of court cases in past years (when the legislation was a little less severe than it is now) where clients accounts were reduced from hundreds of thousands to zero - through a combination of poor investment choice and daily trading.
Since most members of the stockbroking world earn a basic salary and a bonus which is directly linked to the trade commissions earned, temptation has never been far away.
A stockbroker churning an account is not viewed well by regulatory authorities. Depending upon the jurisdiction, it is either frowned upon or actually illegal. As legislation is implemented and enforced, convictions always follow.
Obviously, there is a point until which a stockbroker is making justifiable trades and is genuinely attempting to maximise performance.
As a rule, the
that make these excessive trades are very noticable. The account will be traded not a few, but dozens (or hundreds) of times during the course of a year. Very few technical analysts and even less stockbrokers have the time and skill to do this successfully.
Being able to draw a line between incompetence and
is not always easy. After all, some people really are truly incompetent! But either way, the reputation of the brokerage would often be damaged enough that many potential new investors were scared away.
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For a time, the actions of a few gave the entire stockbroking industry a bad name and reputation. To limit this damage and try to prevent further abuses, most major locations now require brokers to undergo several examinations to ensure that they have at least a basic investment and ethical understanding of their role.
Legislation has also been enacted to make it possibe to punish offenders appropriately.
For more about related topics:
How To Choose A Stockbroker
A Question To Ask A Stockbroker
How Much Should You Be Paying In Stock Market Fees?
For information describing the different types of stockbroker services, please visit:
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Advisory Management Stockbroker
Discretionary Management Stockbroker
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